Valuations for Competitive Network Operators Down Sharply

Back at the start of Q3, competitive network operators were seeing strong valuations following a quarter of good press, M&A activity, and lots and lots of rumors. But in the third quarter and on into the fourth now, the market has turned decidedly ambivalent toward the sector despite continued margin gains and solid results.

Over the break, I finished updating my competitive telecom trends data update for Q3, and I have made a few changes to how I present the data.

First of all, I tweaked the 'latest' valuation datapoint to include a pro forma calculation for merger activity since the end of the quarter for which I have enough data. In this case, it just means that the last LVLT datapoint includes post-GLBC balance sheet and shares outstanding.

Secondly, I changed the EV/EBITDA calculation to use an annualized EBITDA based on the current quarter's EBITDA rather than trailing 12 months. I found this to be necessary to better account for M&A activity for the likes of PAETEC and Earthlink, whose true EBITDA run rate would have not been represented for many distorted quarters otherwise. The main effect of this, other than a bit less smoothness, is a general lower ratio since EBITDA has generally been rising across the sector and ttm lags the annualized quarterly number in this scenario.

Ok, enough talk. Here's the latest chart:

Relative Valuation (EV/EBITDA) for Competitive Fiber Operators

Select:

Everyone has come down a lot since June, with the exception of PAETEC which of course got some boost (but not much!) from the Windstream merger announcement in August. Level 3 is still on top at a multiple of just over 8, but if one gives them credit for $300M in unrealized synergies they'd be down near an EV/EBITDA ratio of 6 - well back in the pack. The metro fiber troika of tw telecom, Cogent, and AboveNet pulled back from multiples of 7.8-8.3 to a mere 6.0-6.6 despite the steady organic improvements by each. Earthlink makes its first appearance on this chart, taking over Deltacom's former low multiples until they prove they can do better with the various CLEC assets they have assembled before their legacy access cash cow runs dry of milk. Fiber-light operator CBeyond has just been crushed since June.

You can always find the latest underneath my competitive telecom trends page. To look at just the companies you are interested, check/uncheck the appropriate boxes on the left. Deltacom is already off by default, and one might wish to uncheck XO and Global Crossing (they'll be unchecked by default next quarter I think). That's assuming you have javascript enabled of course, otherwise, you'll probably have a static Google Docs chart with less functionality (sorry).

I'm struggling with whether to include public hybrid CLEC/ILEC operators like HickoryTech, Lumos Networks, and especially Windstream (following the PAETEC deal) in these charts. Suggestions would be welcome.

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7 Comments So Far

If the U.S. Govt. is in the business of padding enterprise pocketbooks in order to assist them in salvaging brazen offers to competitors with foreign nation emblems as though that Govt. was in the enterprise’s back pocket, this newest rumor and diluted version at 60 percent of the whole will happen.

Considering a U.S. Govt. who once found it appropriate to TACK on as a “TAX” via their hip pocket phone companies, a legacy Spanish-American War expense to its citizens’ phone bills for many decades, this is not a far stretch of the imagination.

I like the chart and evaluation very much and agree w/ Andrew i wouldn’t change it. I also like the fact you’ve included Earthlink as they’ve been building though via very small tuck-in’s which should eventually add some value. I am curious to know which Enterprise Valuation model you are using? Finally, why wouldn’t you include Windstream, Frontier and Centurylink if you are now including Earthlink?

It goes to comparability of the data. All the competitive operators I have historically included are wholesale/enterprise only. I’m trying to include Earthlink since 75% of their revenues are now of that type. What we learn from including ILEC consumer revenues in this I’m not sure.

But as I said, I’m thinking about giving it a try. If nothing else, I could put them in unchecked so you could turn them on if you wanted to see them. Once I find the time to collect the data of course.

From the Windstream S-4 “the expectation that the merger will accelerate Windstream’s revenue and free cash flow growth profile with approximately 70 percent of revenues from business and broadband services” (http://www.sec.gov/Archives/edgar/data/1282266/000119312511236696/ds4.htm#tx219714_34) so I would say Windstream should be included. Additionally according to the most recent 10Q filed by Frontier their revenue in Business is up to 51% of total revenue at $587M for Q with a higher ARPU from Business segment customers so i’d expect more transformation focus on those customers similar to Windstream’s focus (ie. acquisition of Paetec to accelerate) so net net i think you will need to start including both but i agree with your assessment its not totally apples to apples. As for Centurylink that one seems interesting … per their most recent SEC filing $2.248B of $4.63B from what appears to be business focused (inclusive of Qwest/Savvis) so i’d say they are trending towards higher ARPU/emphasis on business segment space.